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A Contrarian Dividend Idea

January 24, 2018 11:51 am
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A Contrarian Dividend Idea

Conventional wisdom dictates that rising interest rates are often punitive for high-dividend stocks and corresponding sectors. That was certainly the case in 2017, as the rate-sensitive telecom sector was the worst-performing group in the S&P 500, while the largest real estate and utilities exchange traded funds posted an average annual gain of 8.5 percent, well below the 21.7 percent returned by the S&P 500.

The WisdomTree U.S. High Dividend Fund (NYSE:DHS) rose 11.7 percent last year. DHS tracks the WisdomTree U.S. High Dividend Index, which includes the top 30 percent of highest yielders from the WisdomTree Dividend Index. DHS's benchmark is weighted by cash dividends paid, but with yield playing a part in the selection process, the fund was hampered by rising Treasury yields.

Conversely, DHS could make for an ideal contrarian value play in 2018 for investors who believe the Federal Reserve will not proceed with multiple rate hikes. Lopsided consensus could bolster the DHS contrarian thesis.

The Consensus Take 

A broad swath of market observers believe Treasury yields will march higher this year, so much so that the trade could be getting a little crowded.

“The thing is that right now there is a remarkably crowded Wall Street consensus that U.S. 10-Year T-note yields will continue to rise in 2018, so much so that predictions by 54 out of 61 economists compiled by Bloomberg in January see them going higher,” WisdomTree said in a recent note. “In fact, not one economics team put a '1' as the first digit on the yield for the end of 2018. This is a crowded consensus.” 

DHS's sector weights highlight its vulnerability to rising Treasury yields. Real estate, telecommunications and utilities names combine for almost 31 percent of the fund's roster, but DHS is trading higher to start 2018 while real estate and utilities stocks sag.

What If The Masses Are Wrong? 

If market participants expecting higher Treasury yields “are proved wrong, which happens too often for comfort when the consensus is lopsided, we could be looking at a value play for the few who entered 2018 with a contrarian view on rates,” said WisdomTree. “And rates may not even have to move lower to aid DHS; it could be as simple as a situation in which rates do not move much higher, or that they chop sideways, disappointing the economists’ collective forecasts and surprising the masses.”

For those wanting to bet on rebounds in rate-sensitive sectors, DHS may be the way to do it. Over the past three years, the ETF's annualized volatility has been significantly below the comparable metric on the largest real estate, telecom and utilities ETFs.

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